Your cousin Dean is interested in investing $10,000 that he won at the dog track

Question

Your cousin Dean is interested in investing $10,000 that he won at the dog track in one of two company’s common stock company A and company B. Data on the most recent Friday weekly prices on the New York Stock Exchange is below. Dean has heard that you have taken a math class in which you studied some statistics and some finance. He has heard the phrase “rate of return” and wants to know anything that you can tell him about that relative to these companies. He would also like to forecast the value of his investment in another month and another two months. You know that your cousin is not particularly concerned about riskiness in his investments, especially given the fact that the money was “found money.” Which company should you tell him to invest in? Why? How do you explain rates of return to your cousin, and estimate them? Once he chooses his company, how do you forecast the value of his investment? Company A 86.27, 88.08, 88.58, 89.99, 92.13, 91.09, 90.16, 91.46, 92.61, 95.54, 96.47, 96.08, 96.49, 98.17, 100.27, 96.71, 97.65, 99.62, 96.98, 98.28, 97.07, 94.2, 95.87, 96.01, 94.85, 96.57, 97.41, 99.09, 97.81, 95.63, 96.77, 95.23, 92.7, 92.8, 92.79, 94.66, 95.73, 95.29, 95.51, 93.13, 93.16, 93.62, 93.20, 95.62, 95.4, 95.31, 96.64, 96.55, 95.98, 93.64, 95.69, 96.09, 96.21 Company B 66.56, 66.15, 66.69, 66.5, 67.94, 68.89, 66.79, 67.85, 69.14, 70.84, 70.33, 72.05, 72.59, 74.10, 76.2, 75.94, 76.67, 76.87, 76.98, 75.99, 75.44, 73.03, 74.49, 73.06, 71.73, 72.69, 73.39, 75.75, 76.19, 76.12, 76.85, 75.5, 72.76, 72.1, 71.65, 71.27, 73.00 ,74.45, 73., 71.47, 73.46, 74.33, 74.69, 75.66, 76.54, 77.78, 78.35, 79.53, 78.94, 77.1, 76.46, 77.49, 77.70

Explanation / Answer

Rate of return

Rate of return is the profit or loss on the investment over a particular time period. Rate of return is expressed as the percentage of the cost of investment.

Formula to forecast the value of Investment:-

Future value of investment = Present value of investment * (1 + Rate of interest)Time in years

More is the risk involved in making the investment, more are the chances of return and vice-versa because there is always positive relationship between risk and return.

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